Andersen/Baptist Trial Gets Underway

May 6, 2002 (PLANSPONSOR.com) - The former chairman
of the board of the Baptist Foundation of Arizona (BFA)
denied Friday that he had been tipped off early to fraudulent
activity by the BFA's management.

Attorneys for Arthur Andersen LLP had alleged that the
board was aware of the fraud as early as 1996, according to
Dow Jones.

However, Reverend W Berry Norwood acknowledged that the
BFA Chief Executive William Crotts told the board at a
December 5, 1996, meeting that the BFA had transferred real
estate assets to another company, in exchange for IOUs.
Norwood also said the board was told that that firm was
controlled by an entrepreneur who “made money maturing
properties,” according to the DJ report.
Additionally, Norwood claimed that Crotts told the board
that if something happened to the firm, the BFA would get
back the properties.

Ponzi Scheme?

The BFA offered high interest rates on retirement
accounts and put its money in real estate. It claimed to be
assisting in the funding of Baptist ministries that,
combined with a promise of above-market returns, drew in
some 13,000 investors. However, Arizona regulators said it
was operating a Ponzi scheme – using money from new
investors to make payments to old investors.

Senior managers at the BFA allegedly used transactions
with companies run by current and former foundation
executives to hide investment losses. One reason the scheme
lasted as long as it did, the lawsuits had alleged, was
that Andersen continued to certify the foundation’s
financial statements.

Signs of Trouble

Andersen attorney Peter Devereaux showed the jury
footnotes in audited financial statements of BFA for 1997
that acknowledged that the foundation was paying out
millions more in interest each year than it was earning –
and that it expected to continue doing so for years.
However, there was no qualifier attached to BFA’s financial
statements expressing doubt about BFA’s ability to continue
as a going concern.

The trust’s expert witness, Dan Guy, testified that the
financial statements of BFA “beg for a work paper” on
whether there was doubt about BFA’s ability to continue as
a going concern.

Devereaux, pointed out that according to accounting
standards, an auditor is only required to evaluate whether
there is substantial doubt about an entity’s ability to
continue doing business for a period “not to exceed one
year.”

Andersen was hired to advise the BFA on its
vulnerability to IRS scrutiny, having audited the
Foundation’s returns from 1984 though 1997, according to
the Washington Post. According to the suit, an Andersen tax
specialist spotted potential trouble, which she thought
could affect Andersen’s audit opinion. But, in an action
eerily similar to recent accusations in the Enron case, an
Andersen partner allegedly told her to delete her written
warning.

Court Costs

Andersen had reached a potential $217 million settlement
in March – just days prior to going to trial. That
agreement would have been the second-largest litigation
settlement ever by an accounting firm over its work for an
audit client, and the largest-ever by Andersen.

However, a month later Andersen says its insurance
carrier was unable to pay the promised settlement – and a
trial date was reset.